The payments company was founded during the dotcom bubble. The PayPal Mafia of founders and employees who became rich when the company was sold to eBay in 2002 include Peter Thiel, Elon Musk, Reid Hoffman, Max Levchin and more.
EBay expanded PayPal into its own publicly traded company in 2015. The split was a spectacular success for those who held onto PayPal stock. From 2015 through the summer of 2021, PayPal shares rose nearly 750%, versus a 140% gain for the S&P 500.
And then the wheels fell off.
The share price is now down 87% from its July 2021 peak.
Not only has the stock seriously underperformed the S&P 500 since eBay’s spin-off, but you would have been better off in the Treasuries!
The tortoise defeated the hare.
Hendrik Bessembinder’s research shows that approximately 60% of all shares perform worse than T-bills in the long term. PayPal is an example of this.1
The rise in PayPal stock shows how concentration can make you rich in the stock market. Hit just one grand slam and you’re set for life.
However, the other side of the mountain shows the dark side of concentration. Sometimes you hit even after you hit a home run.
The current market climate is a good reminder that high flyers sometimes have to make an emergency landing.
If you were to look at any diversified index or fund right now, you would think things are going well.
The S&P 500 is just 0.66% below its all-time high. The All-Country World Index just hit a new all-time high. This also applied to the MSCI EAFE, the S&P 500 Equal Weight Index and the Russell 2000. The Dow Jones recorded 50,000 points this week.
Some investors (not me) like to say that It’s not a stock market; it is a market of shares.
If you look a little under the hood, there are plenty of individual names that are currently in a downright crash.
I looked at the latest list of admissions in individual companies and pulled out some well-known names that you know:
My kids would say these stocks are going bankrupt.
These are name brands. You probably use many of these products or services. These are not just healthy corrections. These are massive crashes of 40%, 50%, 60%, even 70% or worse.
While the stock market as a whole is more or less at new highs.
Perhaps these stocks are a harbinger of things to come. It’s possible that the volatility of certain stocks, combined with the rollercoaster ride in crypto and precious metals, is a harbinger of future stock market pain.
Either way, the action in these names is a warning to investors with concentrated positions in individual stocks.
The stock market experienced one 20% crash in one day on Black Monday in 1987. This happens a few times a year with individual shares.
You could have 2-3 crashes of over 50% in your lifetime for the overall stock market. This happens regularly with individual stocks, regardless of what is happening in the market.
If you invest in individual stocks, you can make a lot of money if you’re right.
That upside potential only exists because of the enormous downside potential.
Concentrated positions are very nice on the positive side.
They can destroy you on the other side too.
Further reading:
Does diversification finally work again?
1It’s also worth pointing that out some Investors, in the meantime, obviously made money on PayPal stock when they took some profits and sold them.
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